Entrepreneur shareholder an employee despite no pay

The Court of Appeal has held that an investor in a company was an employee despite his substantial shareholding in the business, other business interests, and absence of any remuneration.

Background

Mr Stack, the Claimant in this case, was the major investor in the Respondent company, Ajar-Tec Ltd. He was not paid any salary (and there was no agreement that he would), but he received a share of the profits in the business in the usual way. There were two other shareholders, including a Mr Martin, who looked after sales and was employed for a salary under a normal employment contract in addition to receiving a share of the profits.

The business relationship came to an end in 2009, with the upshot that Mr Stack tried to bring claims for unfair dismissal as well as unpaid wages. The case spent many years in the courts, with two returns to the Court of Appeal, leading the Judge to comment that “this case is not a good advertisement for our system of resolving employment disputes”.

The Court agreed with Mr Stack that he had undertaken a positive, enforceable obligation to work for the company, and that a contractual obligation on the part of the company to pay him could be implied as ‘necessary to give effect to the reality of the relationship’ (a test for implied terms derived from previous case law). It was significant in this regard that Mr Martin had been paid a salary for his sales work in addition to his dividend.

Mr Stack was therefore entitled to bring claims for reasonable wages and unfair dismissal, because he was an employee.

Implications

It has previously been established that neither directors nor majority shareholders are precluded from being employees. This case suggests that pay is not needed, although there needs to be an implied obligation to pay.

In order to avoid protracted litigation as in this case, employers and employers are well advised to have the correct paperwork in place from the outset, and to pay working shareholders where they are obliged to attend for work.